Audit: Real estate investments cost Detroit pension funds more than $144 million over 2 years

Detroit Police and Fire Retirement System and General Retirement System real estate investments have cost the city's two pension funds more than $144 million during the past two fiscal years, according to an audit of the funds requested by Emergency Manager Kevyn Orr.

The preliminary findings are part of an auditor general and inspector general report released Thursday afternoon.

The pension funds were too heavily invested in real estate in 2010-11 and 2011-12, the report says. The General Retirement System had 12.22 percent of its assets in real estate in 2010-11 and 13.99 percent in 2011-12, higher than the fund's self-imposed limits of 10 percent. The GRS annual report documented more than $73 million in losses.

Likewise, the Police and Fire system had 14.33 percent in real estate in 2010-11, more than double the 7 percent limit. In 2011-12, there was 12.6 percent in real estate, higher than the 8 percent limit it had for that year. The total of losses for the system was more than $71 million.

Bruce Babiarz, a public relations consultant for the Police and Fire system, said pension fund employees cooperated with auditors daily and that "we have nothing to hide."

He also said that "everyone lost money in real estate deals between 2008 and 2012."

The report produced comparisons to systems with "similar participation levels," including the Employee Retirement System of the City of Milwaukee, which had a 2012 real estate allocation of 8.5 percent, and the Policemen's Annuity and Benefit Fund in Chicago, which had an allocation of 4 percent.

The audit first focused on the pension funds' real estate investments because of ongoing investigations into alleged criminal activity. Prior to the investigation, the GRS and DPFRS were heavily invested in real estate, the report's executive summary says.

"This report helps shed light on certain practices undertaken by Detroit's two pension funds," Orr said in a news release. "The purpose of the audit is to help identify how the city can address its present financial crisis and going forward help determine the basis for what, if any, actions must be taken."

The report also found "disconcerting administrative protocols for the handling of employee health care and other benefits," according to a news release.

The audit also found that 13 percent of the city's unemployment compensation claims processed between July 2011 and March 2013 were "likely fraudulent."

In addition, there were questionable interest rates applied to GRS annuities and overtime pay included in the average final compensation calculation, the report's executive summary says.

Orr issued an executive order in June directing the auditor and inspector general to look into "possible waste, abuse, fraud or corruption, including, but not limited to, administrative misfeasance or other impropriety with respect to the administration, operation or implementation of benefit programs."